Bets totaling more than $335 million have been wagered by those who question the future prospects for Spectrum Pharmaceuticals (SPPI). That figure reflects the 27 million shares currently sold short, over 55% of Spectrum's float. Are these short-sellers right, or can the company prove them wrong in 2013? The answers to the following three questions will, in large part, make the difference.
1. Can existing product sales momentum continue?
Spectrum's total revenue jumped 160% from 2010 to 2011, due in no small measure to shortages of generic leucovorin, which competes against the company's lead product Fusilev. Revenue in the first nine months of 2012 beat the 2011 totals for the same period by 41%.
Can this torrid rate of growth continue? Many would answer with a resounding "no." Fusilev accounts for around 85% of sales, so for Spectrum to keep growing at a rapid pace, the drug's momentum must remain largely intact. However, the shortage of generic leucovorin won't last indefinitely. The entrance of a new supplier, Sagent Pharmaceuticals (NASDAQ: SGNT), in late 2012 could help change the competitive landscape this year.
Naysayers could also point to relatively slow growth for Spectrum's Zevalin. The non-Hodgkin's lymphoma drug saw sales increase by 6% in the first nine months of 2012 compared to the prior year. It should be noted, however, that rival drug Rituxan didn't grow at a much faster rate. Sales for the drug, which is jointly marketed by Biogen Idec (BIIB -0.85%) and Genentech, increased 7% year on year in the first nine months of 2012.
Spectrum thinks it can keep sales going strong, though. The company points out that only 50% of physicians who can prescribe Fusilev have been called upon. Spectrum has expanded its sales force to promote all of its products, including newly-added Folotyn, which it picked up with the 2012 acquisition of Allos Therapeutics.
2. Will pipeline drugs see success?
Hopes for experimental bladder cancer drug apaziquone faded in 2012, after two phase 3 trials failed to show significant improvement in the recurrence of tumors. While Spectrum and collaboration partner Allergan (NYSE: AGN) continue to move forward with studying the effects of the drug on patients with more aggressive bladder cancer, the news presented a big setback.
At least Spectrum doesn't have to worry about clinical results for one drug in its pipeline. The company announced in December that Belinostat met its primary endpoint in a registrational trial for treatment of peripheral T-cell lymphoma. A New Drug Application is expected to be submitted in mid-2013, with an FDA decision likely in 2014.
Some sizzle from the pipeline has already emerged in the first couple of weeks of the new year. Spectrum reported good phase 1 results for RenaZorb, its oral tablet targeting reduction of phosphate levels in patients with end stage renal disease. The company plans to move forward with a phase 2 study and find a licensing partner for outside the U.S.
3. Will Spectrum buy back or dilute shares?
Spectrum could take action in 2013 in ways that could either help or harm shareholders. In August, the company's board approved a share repurchase of up to $100 million. Spectrum has $146 million in cash, so getting close to that level wouldn't be too much of a problem. It would be interesting if the company maneuvered a buyback in a way that prompted short-sellers to begin covering their positions. Current shareholders would enjoy such a move.
On the other hand, Spectrum's management seems to like wheeling and dealing. If they set their sights on an acquisition target or an appealing licensing arrangement, it wouldn't be a big shock for the company to issue more shares. Of course, current shareholders wouldn't enjoy this kind of move, because the dilution would likely cause shares to decrease.
Spectrum could have great success with growing product sales and see positive results from its pipeline. Even with good news on these fronts, shareholders could still be whacked upside the head by share dilution.
Answers
It's too early to know the answers to these pivotal questions. My prediction, though, is that Spectrum will experience sales growth in 2013. It still might not be enough to convince short-sellers that the company is on the right track, though. I don't anticipate any major pipeline breakthroughs, although Belinostat should move ahead smoothly. Spectrum probably will find a partner for RenaZorb, also.
Finally, my guess is that the company will buy back shares and make some type of deal requiring cash, with neither causing too much of a stir in the stock price. Will my predictions be on target? That's another question altogether.
